Loan-to-value

Loan to value ratio- The ratio of the loan amount to the property valuation and expressed as a percentage. E.g. if a borrower is seeking a loan of 200,000 on a property worth 400,000 it has a 50% loan to value rate. If the loan were 300,000, the LTV would be 75%. The higher the loan to value, the greater the lender s perceived risk. Loans above normal lending LTV ratios may require additional security. 

The nature and quality of the SCF s assets, underpinned by conservative loan-to-value thresholds. 

There is a loan-to-value limit imposed of 60% for residential mortgages and 100% for public sector loans and hedging contracts against interest rate risk are permitted in the collateral pool. 

The loan-to-value ratio (LTV) gives a measure of the equity a borrower has invested in a property. A large equity stake provides an important motivation to avoid defaulting on a loan. The ability to save a large deposit may indicate a higher level of financial discipline by the borrower, which should also indicate a lower likelihood of default. 

The loan-to-value ratio (LTV) represents the size of the loan relative to the sales price of the vehicle. The lower the LTV, the more equity a borrower has invested in the vehicle. The equity in the vehicle should act as an incentive to keep the borrower from defaulting, and thus losing the invested equity. Over time, the amount of the loan will decrease as principal is repaid by the borrower. However, the value of the vehicle will most likely be decreasing as well, based on the vehicle s depreciation curve. This makes it necessary to analyse the rate at which principal is being repaid (amortisation schedule) against the rate at which the vehicle is depreciating in order to determine the borrower s expected equity in the vehicle (see term distribution above). 

Land purchases and many of the costs associated with faciUty development can be accompHshed with long-term loans of 15 to 30 years. Equipment such as pumps and tmcks are usually depreciated over a few years and are funded with shorter-term loans. Operating expenses for such items as feed, chemicals, fuel, utilities, salaries, taxes, and insurance may require periodic short-term loans to keep the business solvent. The projected income should be based on a reaUstic estimate of farmgate value of the product and an accurate assessment of anticipated production. Each business plan should project income and expenses projected over the term of all loans in order to demonstrate to the lending agency or venture capitaUst that there is a high probabiUty the investment will be repaid. 

Contemporary observers were stunned by the high annual dividends the leading dyestuffs firms paid from the 1890s to World War I between 18 and 26%. ° But hidden assets, for times of economic crisis like that after 1873, loans to pay back, a quick amortization of plants and equipment, and piling up of reserves, increased real fixed capital, so that paid dividends did not reflect the real value of these firms. Probably dividends should be halved to reach a serious level of valuation. More significantly, these dividends were paid by oligopolistic firms that had divided the German mar-... 

In this illustration, all the money produced in the project is sent to the conpany. The company pays its investor, the bank, and draws off the rest as profit. The bank also makes a profit from its investment loan to the conpany. The project is the source of money to provide profits to both the company and the bank. The project converts a low-value, raw chemical into chemicals of higher value. Without the investor, the plant would not be built, and without the plant, there would be no profits for either the company or the bank. 

If money is borrowed, interest must be paid over the time period if money is loaned out, interest income is expected to accumulate. In other words, there is a time value associated with the money. Before money flows from different years can be combined, a compound interest factor must be employed to translate all of the flows to a common present time. The present is arbitrarily assumed often it is either the beginning of the venture or start of production. If future flows are translated backward toward the present, the discount factor is of the form (1 + i) , where i is the annual discount rate in decimal form (10% = 0.10) and n is the number of years involved in the translation. If past flows are translated in a forward direction, a factor of the same form is used, except that the exponent is positive. Discounting of the cash flows gives equivalent flows at a common time point and provides for the cost of capital. 

Time Value of Money A large part of business activity is based on money that can be loaned or Borrowed. When money is loaned, there is always a risk that it may not be returned. A sum of money called interest is the inducement offered to make the risk acceptable. When money is borrowed, interest is paid for the use of the money over a period of time. Conversely, when money is loaned, interest is received. 

If the fractional inflation rate is a fractional interest rate on a loan can be corrected to an effective rate of interest by Eq. (9-116) with ii substituted for (DCFRR). The effect of various amounts of loan, borrowed at various interest rates ii, on the net present value of a particular, fairly simple project is shown in Fig. 9-37. Thus, if 25,000 were borrowed at an interest rate of 15 percent for the project, the (NPV) would be about 43,000 at a zero inflation rate. But if the inflation for goods and services i, is 10 percent, the effective interest rate for that loan can be calculated from Eq. (9-116) to be only 4.55 percent. It is seen from Fig. 9-37 that this increases the (NPV) of the project to 48,000. This confirms the economic advantage of borrowing at a fixed interest rate in a time of general inflation. 

The advantage of using common stock to finance assets is that it does not incur nxed interest charges. Furthermore, there is no maturity date, as there is with all loans and most preference issues. Common stock can often be issued more easily than debt can be financed. However, the flotation costs of common stock can be quite high, especially when stock values are depressed, so that large discounts for the stock are needed to induce purchase. 

A positive value of any term in Eq. (9-177) implies an increase in working capital, and a negative value a decrease. For example, the sale of fixed assets such as plant, buildings, land, etc., is a source of cash, and the purchase of fixed assets uses up cash. Similarly, an increase in financial resources in the form of loans and stock and bond issues is a source of cash, and a decrease in financial resources in the form of repayment of loans, retirement of stocks and bonds, and the payment of cash dividends uses up cash. (Note that a stock dividend as opposed to a cash dividend does not use up cash.)... 

When an individual buys a house he generally cannot afford to pay back a certain percentage plus a rate of interest on the unpaid balance each month. Even when he can, he would prefer to pay the loan back in equal installments each month. A formula is developed in Table 10-6 for determining the value of the payment. The result is ... 

The present value of an annuity that has been established to repay a loan is the amount of money borrowed. From the previous discussion... 

Loans are usually money borrowed from financial institutions. The prime interest rate is the minimum interest rate that leading banks charge their most credit-worthy customers on large loans. In 1973 this reached a high of 10% per year (Table 10-12). When it was 7.5% per year one big chemical company was reported to be paying 10% interest per year. Usually 0.5-2% more than the prime interest rate is a reasonable value. 

If Ihe assets for the company whose balance sheet is given in Table 10-13 can only be sold at half their listed value, then after all the current liabilities and bonds have been paid off, there would be nothing left for the stockholders. In fact, some of the bondholders might not be totally reimbursed, since it would cost something to liquidate the company s assets. This company could not get a loan at prime interest rates. It would have a better chance of getting a good interest rate if its balance sheet resembled that given in Table 10-14. 

This would also look better to stockholders. They hold a larger share in the company and would at least get something back in case of a disaster. Therefore the stock would sell for more (and have a higher present value to the company) than the stock of the company whose balance sheet was given in Table 10-13 (assuming each had the same number of shares outstanding). This indicates that there is a balance that must be maintained between the total value of the loans, bonds, and stocks outstanding. 

In business, money is either borrowed or loaned. If money is loaned, there is the risk that it may not be repaid. From the lender s standpoint, the funds could have been invested somewhere else and made a profit therefore, the interest charged for the loan is compensation for the forgone profit. The borrower may look upon this interest as the cost of renting money. The amount of interest charged depends on the scarcity of money, the size of the loan, the length of the loan period, the risk that the lender feels that the loan may not be repaid, and the prevailing economic conditions. Engineers involved in the presentation and/or the evaluation of an investment of funds in a venture, therefore, need to understand the time value of money and how it is applied in the evaluation of projects. 

A variety algorithms can be used to calculate the loadings and. scores for PCA. A comiEonly employed approach is the singular value decomposition CS T>) algoriiim (Golub and Van Loan, 1983, Chapter 2). A matrix of arbitrary size can be 5sftten as R = USV. The U matrix contains the coordinates of the... 

Again, thank you for your comments and for choosing American Mortgage Company for your loan. We will be working hard over the life of your loan and hope you will be pleased with our service in the future. We value your business and want to keep it. 

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